Virtual power plants – the hard sell

Share this article:

There has been significant and increasing interest in Virtual Power Plants (VPPs) in recent years. This interest is fuelled by generous state government subsidies announced in the past 12-18 months, including Tesla and the South Australian government’s plan for an $800 million, 250 MW VPP consisting of 50,000 Tesla Powerwall 2 batteries; the SA government’s Home Battery Scheme which requires subsidised batteries to be “VPP capable”; the Solar Homes program in Victoria; and the ACT Government’s Next Generation Energy Storage program.  MHC analysis has found that there is currently 16 battery based VPP projects either in progress or planned across 6 States with a planned total of around 55,000 batteries, leveraging $67m of subsidies.

However, the current level of actual implementation is small with only about 2,600 batteries currently integrated into VPP’s. Examples include retailer Powershop and software firm Reposit Power’s “Grid Impact” program which enables Powershop to dispatch surplus solar capacity to the grid, through batteries installed in participating homes and business premises, to alleviate peak demand, plus a number of ARENA funded projects including AGL’s VPP targeting  1,000 households in Adelaide, GreenSync’s trial with United Energy in Mornington Peninsula, and Simply Energy’s VPPx project in South Australia.

The interest in VPPs is driven mainly by consumer interest in battery technology and the opportunity many electricity retailers have identified in the transition towards a future energy retail model founded in energy services, rather than commodity energy supply. VPPs are inherently valuable to the energy system through their ability to participate in energy markets.

What is a Virtual Power Plant (VPP)?

A VPP refers to the aggregation and orchestration of distributed energy resources (DERs), coordinated virtually using software and communications technology, to provide a flexible and dispatchable source of energy or load for the grid that can derive value from existing and emerging energy markets, e.g. wholesale markets, FCAS and, potentially in the future, network services. An aggregator establishes communications and controls a portfolio of DER assets to optimise energy flows into and out of the grid. This may include behind-the-meter controls to optimise the net load of an end customer.

Major challenges for VPP implementation

While there has been a lot of interest and project announcements, establishing and operating VPPs has proven to be challenging. Issues have occurred on most fronts – from the technology itself, to the quality and cost of installations to the sales and marketing efforts to get customers engaged.

Technology challenges

An example of the technology challenges that can occur was AGL’s write down of their $27 million investment in Sunverge during their VPP trial in South Australia.  AGL added new suppliers LG Chem and Tesla to their trial “reflect[ing] advancements in the market since the program was launched” and offered free upgrades for existing trial customers. AGL also reported technical challenges associated with grid conditions stating that “high voltage levels in many parts of the distribution network regularly affect some customers by making their ESS systems inoperable. During voltage excursions, customers’ inverters disconnect from the grid, making them unavailable to the VPP.” [1]

MHC also understands that a common issue with VPP technology is the loss of connectivity with the assets due to telecommunication limitations and subsequent flow on effects to normal battery operation and orchestration activities.

Installation challenges

As part of the installation process for many of these trials and VPP projects, installation is typically carried out by Clean Energy Council (CEC) accredited installers. CEC accreditation is seen as an efficient way to ensure personnel installing the systems have the necessary licenses, certification and qualifications required. Despite this, industry experience installing batteries in some jurisdictions has shown that installation outcomes can be poor.

Skills shortage leading to poor customer outcomes

Battery installers are often accredited solar PV installers as well. Due to the high demand for PV installations it can be difficult to secure battery installers as these installations often take just as long and are not as profitable for the installers. As a result of the high demand for battery and PV installers, there has been a negative impact on customer experience, including extended delays of up to 2-3 months for site visits and installation as well as poor installation quality and practices. The availability of skilled workforce is a significant issue as it can take more than 12 months to train a qualified electrician to be competent in battery installations[2].

Installation costs higher than expected

Various factors contribute to higher than expected installation costs, including increased travel costs due to the limited number of installers that are available to service the market, potential upgrades to switchboards or other installation requirements such as retrofitting new batteries to older solar system technology or the requirement for bollards and other safety measures.

Incorrect installations could lead to VPP performance or safety issues 

Audits conducted by relevant parties have found that a large proportion of battery installations in some VPP trials were non-compliant or incorrectly installed[3]. Correcting incorrect installations can lead to delays in commissioning a battery system for customers, increase installation costs and lead to poor customer experience. Importantly, incorrectly installed battery systems may not perform to specification and therefore do not respond as expected in a VPP. Safety issues could also arise, both for the installer and customers’ premises.

Marketing and sales challenges

Cost of storage is an issue

While retailers have found there is significant interest in battery storage amongst residential customers, the high upfront cost of storage remains a barrier for many residential customers. Even with significant subsidies available, Simply Energy found that 39% of leads were unsuccessful as a result of the cost of storage, indicating that customers are reluctant to pay $8,000 for an energy storage system. This was in line with the views of others at ARENA’s VPP Knowledge Sharing Workshop where the panel discussed the payback for most residential storage systems is approximately 10 years, making it unattractive for many residential customers.

The sales process is complex

Recruiting customers into a VPP is a much more involved and complex sales process when compared with typical energy sales or typical battery sales, which can have an impact on lead conversion times and customer uptake rates. The complexity lies primarily in explaining a technical product and service. Sales staff spend a lot more time educating customers around the concept and benefits of a VPP, as well as resolving technical questions regarding battery specifications and the performance and operation of batteries in a VPP.

Customers are reluctant to give up control over batteries

Explaining the concept of a VPP is further compounded by the low acceptance amongst residential customers for third parties, in this case retailers, to control their batteries. In part, this may be driven by their lack of trust for energy companies and, to some extent, their desire for energy independence. Many customers seek to distance themselves from energy companies by purchasing a battery, so to then strike a deal with and energy company to be part of a VPP is misaligned with their objectives.

Multiple subsidies causing market confusion

There have been a multitude of commitments by Governments and oppositions at a state and federal level that many customers are confused about when is the best time to buy. For example, election announcement before and after the SA state elections resulted in competing government subsidies for energy storage systems. This uncertainty led to a slump in battery sales as customers put off purchasing decisions to determine which might be a better deal. The number of different battery subsidies available in the SA market has also contributed to customer confusion, where there are multiple different price points for the same product.

What does this mean for the industry?

While these challenges represent a risk for other VPP projects and state government subsidies, it also presents an opportunity.

Improving installation standards

A Working Group led by the Clean Energy Council has submitted a draft code, The New Energy Tech Consumer Code (formerly the Behind the Meter Code), to the Australian Competition and Consumer Commission (ACCC) for authorisation. The draft code seeks to set a minimum standard of customer service for customers looking to purchase behind the meter products. Installation processes, however, have been addressed through limited references to existing standards. Recent experience with some battery installations in SA would indicate that these standards may not always be adhered to.

This provides an opportunity for state governments to leverage current subsidy programs to improve installation practices in their relevant jurisdictions. In Victoria, for example, all electrical installations are required to pass an independent inspection by Energy Safe Victoria (ESV), an independent technical regulator. This requirement includes all grid connected solar PV and battery installations. Electrical installation requirements differ in other states where inspections are often limited to a sample of installations. Mandating safety inspections in other states, as part of battery (or solar) subsidy programs, can improve installation practices and mitigate some risks.

Innovation in product design and marketing

Retailers will need to explore new approaches to enticing customers to enlist their batteries or other DERs in a VPP. This could include:

  • Leveraging lower cost DERs or existing household loads which could be controllable with the addition of lower cost solutions. These loads may include pool pumps or systems, air conditioning loads and electric hot water systems.
  • Providing white-label retail services to other brands (existing or emerging) for the opportunity to lead on aggregating VPP customers. sonnenFlat is an example where the original equipment manufacturer is the customer-facing brand in selling and recruiting residential batteries into a VPP, while a white-label retailer (Energy Locals) provides the underlying retail services to trade the VPP value in energy markets.
  • Simplifying the VPP product offering. sonnenFlat is also an example where residential customers are offered an energy package with a fixed monthly fee, based on the household’s energy consumption pattern, size of its rooftop PV system and the sonnen battery capacity. Customers are likely to value the simplicity and certainty associated with these packages – provided the price is right!
  • Finally, product offerings could be phased to provide a gradual increase of automated, third party control, for example from providing a basic home energy management system with information prompting manual control to fully automated VPP control. This could help overcome the lack of trust in energy retailers by mainstream residential customers.

[1] AGL, Virtual Power Plant in South Australia, Stage 2 Public Report, page 3 and 6

[2] ARENA, VPP Knowledge Sharing Workshop – summary notes, March 2019

[3] Simply Energy VPPx, ARENA Stage 1 Knowledge Sharing Report – February 2019 Public Report, p18